Hot Chocolate: Somebody Just Bet $1 Billion On Cocoa

Big action in chocolate: Somebody bought almost all of the cocoa registered in European warehouses last week.

The buyer, according to the FT and the Telegraph, was a company called Armajaro, which runs several hedge funds and sells cocoa to the chocolate industry.

The purchase — 240,000 tons, worth about $1 billoin — amounts to about 7 percent of global annual production of cocoa. So it's not like the hedge fund can immediately turn around and control the global price of cocoa.

But if this year's cocoa harvest is weak, the buyer could have significant pricing power, Laurent Pipitone of the International Cocoa Organization told me today.

One of Armajaro's cofounders made £40 million in a few months on a similar bet back in 2002, according to the Telegraph.

Cocoa, like lots of other commodities, trades on futures markets. The markets let both buyers and sellers hedge risk by fixing prices in advance.

But something weird happened in the London market recently: Contracts to buy cocoa in July were significantly more expensive than contracts to buy cocoa in December. That suggested somebody was making a big buy in July.

"We knew it was a possibility that one market player was getting his hand on a large quantity of cocoa," Pipitone said.

Some groups have criticized the London exchange because it does not limit the amount of cocoa that a single trader can buy, according to the WSJ. That kind of limit can serve as a check on traders' ability to manipulate prices.

Anyway: The July contract expired last week, and the buyer took delivery of 240,000 tons of cocoa. That's enough to fill five ships the size of the Titanic with cocoa beans, according to Marketplace.

Demand has for cocoa has been rising, and has exceeded the supply in three of the last four years, Pipitone said. The price of cocoa has been rising steadily, recently hitting 33-year highs. The price of chocolate has risen as a result.

Most of the world's cocoa is grown in West Africa, and the big harvest runs from October through January. It's too early to say how this year's harvest will be, Pipitone said.

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